Roku CFO: Supply chain disruption will affect TV market through the holiday season

Roku reported key metrics such as active accounts number of hours streamed by subscribers that were slightly below consensus.

Advertising-based video-on-demand pioneer Roku this afternoon reported Q3 revenue that missed Wall Street's expectations, but a net profit that was substantially higher than expected, and an outlook for this quarter's revenue that was lower than expected. 

The report sent Roku shares down 10% in late trading. 

During a conference call wtih reporters following the results, CFO Steve Louden said sales in the quarter had been impacted by the decline in television sales, given that Roku's is affected by the number of TVs tuning into Roku's service. TV sales in the U.S. dipped 31% in Q3, noted Louden. U.S. TV sales, he said, were below pre-covid levels in 2019.

Hence, "at a macro level, the disruption of the global supply chain, for the TV industry, is emblematic of a lot of industries," said Louden, with "elevated component pricing, inventory availability issues, and supply-chain delays."

Louden said that the supply-chain disruption will last through the holiday season and into next year. "Similar issues will continue in the holiday season," said Louden. He noted, too, that advertisers are trimming budgets this holiday season, which is also going to impact Roku's revenue from ads.

Roku has not had any problems with getting parts for its own Roku Player hardware, said Louden, and "I don't foresee any issues on Player" availability for the holidays, he said. Roku absorbed higher costs for its player, noted Louden. "On the player side, we made the decision to insulate consumers from cost increases," he said. Roku's Player sales in units terms were "down from a significant demand spike in 2020, but still way above pre-covid levels," said Louden.  

That is mainly a result of the fact, he said, that "Our team has done a great job working around the rapidly evolving constraints to source new supply, such as changing the chips our players work with.

In prepared remarks in the shareholder letter, Louden, and CEO and founder Anthony Wood, remarked that "As the global shift to TV streaming continues, our performance demonstrates the strength of our business fundamentals and the momentum of our platform monetization."

The two added, "We are making significant progress with traditional TV advertisers, while also expanding our total addressable market to digital-first advertisers. 

Despite the ongoing headwinds created by the global supply chain disruptions, Roku remains well positioned as a result of our scale, brand, technology, and relentless focus on the TV streaming experience."

Revenue in the three months ended in September rose 51%, year over year, to $680 million, yielding a net profit of 48 cents a share.

Analysts had been modeling $684 million and 6 cents in profit per share. 

For the current quarter, the company sees revenue of $885 million to $900 million, below consensus for $946 million.

Active accounts in the quarter rose 23%, year over year, to 56.4 million, slightly below consensus for 56.7 million. The number of hours streamed by subscribers rose 21%, year over year, to 18 billion. That was slightly below consensus for 18.3 billion.

The average revenue per user, however, came in at $40.10, on a trailing-twelve-month basis, which was higher than the average estimate for $39.20.

The large profit beat was attributable to the company having lower-than-expected player revenue, which boosts margins, and also having higher revenue per user from its media licensing and advertising sales. 

Player revenue of $97.4 millon missed Wall Street's forecast for $121 million, while the Platform business of ads and licensing deals brought in $582.5 million, well above the average estimate for $562 million. 

Player revenue, where Roku had to absorb the higher component costs, had a negative gross profit margin of 15%, while platform gross profit was positive 65%. Those numbers were both very different from Wall Street's estimate for negative 13% and positive 48%, respectively.  

"The 53.5% gross margin overall [for Roku] is largely the platform margin at around 65%," Louden told ZDNet. "That was fairly similar to Q2. We had strong performance not only in advertising but also entertainment as well as content distribution." Louden noted that Roku has had "strong margins in content distribution the last several quarters."

"We feel pretty good about how that shows that, as the platform scales and monetization increases," it benefits profitability, he said. 

Louden added that reaching a "milestone" of having $40 per user in average revenue, annually, was a result of "investing significantly" in Roku's platform, with operating expenses up 40%.